Opportunities Funds Commentary

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UPDATE
Trident Investment Management, LLC
Opportunities Funds Commentary
January 31, 2012
Performance Discussion
The dawn of 2012 was accompanied with market euphoria. Equity markets roared upward in January
with the S&P 500, MSCI Europe and Nikkei indices all up 4.5%, 3.8% and 4.1% respectively. The
emerging markets, which suffered in 2011, rallied with the MSCI Emerging Markets Free index up
11.2%. Commodities rose with gold up 11.1% to end at $1,737.6 an ounce and oil up 3.35% to end at
$110.69 a barrel. The bond markets also performed with the 10-year Treasury rallying 0.08% to end at
1.79%. Credit spreads also came in significantly with the U.S. Investment Grade index tightening 0.19%
to end at 1.00%. The only casualty in the month was the U.S. dollar, which depreciated against most of its
trading partners (all figures in U.S. dollars).
Our funds finished January almost flat. Our long positions in gold and oil stocks helped performance, but
this was almost entirely offset by our short positions in credit, which hurt. Our fixed income, currency
and other positions did not contribute much to returns. The data we have seen so far for 2012 suggest that
the underlying problems in the world are far from being solved. Policymakers are resorting to increasingly
desperate measures to postpone a reckoning, which we believe is both closer and likely much more painful
than markets expect. We are struck by the willingness of market participants to approach each new year
with extreme optimism which has inevitably been proven wrong over the next few months. We believe
that the current market sentiment provides us yet another opportunity to position for the disappointment
that we expect should follow when reality bites.
We have started to add to our core positions over the past month and expect to be doing so for a few weeks
to come. January saw selloffs in Norwegian and Australian bonds, a move which we expect will continue
through February. We have begun to add selectively to our exposure in these markets. The Fed’s willingness
to continue quantitative easing even in face of what appears to be marginally improving U.S. economic data
has convinced us to add to our long gold positions and our Treasury shorts. On the equities side, we have
increased our net long exposure, with the additions being largely in the emerging countries and Canada,
both of which we feel have significant upside. We have been able to add to our exposure at levels that we had
not anticipated in all of 2012 – such has been the market euphoria of the last few weeks.
Market Outlook and Strategy2011 Review
The primary reason for the market optimism in January was the belief that the acute phase of the European
crisis was over and that the global economy was therefore back on track. The economic data over the
month was largely mixed suggesting at best a global economy that was bottom-bouncing rather than
readying for a sustainable lift-off. Yet, there is no doubt that European financial conditions improved
thanks to the European Central Bank’s (ECB) Long Term Repurchase Operation (LTRO) instituted in
December 2011. We generally agree with the markets that the LTRO may have allowed us to exit the
acute phase of the EU crisis. However, the global crisis itself was engendered by longer-term structural
imbalances in many of the world’s major economies which have not been addressed. In fact, most of the
world’s policymakers view the EU situation as an aberration specific to that region rather than as a wake-
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UPDATE
up call for better economic self-management. Even worse, the policy consensus is to adopt short-term fixes
for the economic issues the world faces rather than make the painful, but necessary long-term adjustments.
We believe this nearsighted thinking is going to make the ultimate resolution of the underlying problems
much harder.
We lay out a framework to review economic conditions that lead to crisis below. We then consider the
European crisis in some detail, and also attempt to identify future global flash points.
An Economic Crisis Framework
The National Income Identity in economics can be written as:
Y = C + I + G + (X – M)
Where Y is income, C consumption, I investment, G government expenditure, X exports and M imports.
If we assume that the taxes paid to the government are T, we can rewrite the above identity as:
Y – T = C + I + (G – T) + (X - M)
or After Tax Income = Consumption + Investment + Fiscal Deficit + Net Exports
What is interesting here is that a country can boost its income either by increasing its deficit expenditure (G-T)
or boosting its net exports (X-M) or both. However, if a country is running a trade deficit with (X-M) < 0, it can
still increase its income by a more than offsetting increase in its fiscal deficits to ensure that (G-T) > (X-M).
The identity above is a snapshot in time of a country’s economy and does not consider its accumulated
debt load directly, except to the extent that debt service costs show up as a part of government expenditure
G. However, we can rather easily make the transition from our formula above to analyzing a country’s
debt dynamics.
When a country runs a fiscal deficit, but has no trade deficit, its government is living beyond its means
and adding to its stock of domestic debt. This debt represents a burden for future generations to service.
Moreover, the debt so incurred is owed by the government to its own people. As such, a fiscal deficit is
essentially a redistribution of wealth across various sectors of the population. The government incurs its
expenditures to benefit some and induces others to pay for the same. The inducement is in the form of
the interest rate which can be viewed as the cost to get some members of society to postpone their current
consumption in return for future income. The beneficiaries of the government largesse are, in turn, being
allowed to overspend today but have to generate the needed future income to pay for their expenditures
along with interest.
A country’s trade deficit comes about for a variety of reasons. Some nations may lack certain critical
resources necessary but yet may be unable to produce enough things that other nations might find
desirable. Yet others may not lack for resources but nevertheless are unable to produce the necessary
materials at a reasonable cost relative to their trading partners. In either event, we can simply view the
country in question as being uncompetitive. A trade deficit means that foreigners, in selling to our country,
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UPDATE
accumulate claims on it. Continued large trade deficits thus result in increasing debts payable to foreigners.
This in turn results in foreigners owning or having claims against much of the assets and/or productive
output of the country. High domestic inflation often creates trade deficits because it is increasingly cheaper
to buy from overseas than produce locally. Also, a trade deficit may not result from government policy at
all – it is entirely possible for private cross-border capital flows to foster if not expand trade deficits even with
active government discouragement.
A reasonable position would be that for long-term economic success a country should aspire towards
avoiding both fiscal and trade deficits over an economic cycle. Some would argue that a small fiscal deficit
may be appropriate and even desirable, but the fact remains that any such deficits should keep the ultimate
debt loads of the country manageable. When the debt levels of the country rise past certain thresholds,
crises typically follow. History shows us that these thresholds are at a sovereign debt stock of about 90% of
GDP (though fiscal deficits themselves may vary from year to year). With large, sustained trade deficits, the
foreign debt of the country typically increases. When a significant fraction of the country’s export earnings
go to servicing foreign debt, it becomes increasingly vulnerable to a loss of foreign confidence which could
precipitate either an exchange rate crisis or, with a pegged exchange rate, a funding crisis. A trade deficit
of over 7% of GDP has generally proved an important trigger point for such crises. When a country has to
contend with trade and fiscal deficits, the thresholds for crisis are surely lower. However, since the luxury
of running both deficits for extended periods of time seem to be a privilege of the world’s wealthiest nations
of late, the crisis onset could be delayed because of the unwillingness of the world to acknowledge reality.
Some Crisis Examples
The table below lists some of the world’s countries/regions whose economic conditions triggered crises over
the last several years. In many of the situations below, the economic numbers are flashing red but the crisis
has not occurred yet. The numbers in parantheses show the year(s) of crisis or what we believe to be the
time for a potential crisis.
Exchange Rate
Floating Fixed
Trade Issues
Mexico (1994 Tequila Crisis)
Asia (1997 Crisis)
Argentina(1994-2001 crisis)
Fiscal Issues
Japan (2012?)
European Union (2013?)
Trade and Fiscal Issues
US (2013?)
UK (2012/2013?)
Greece, Portugal, Spain (2010-)
Dealing with Crisis
When a country runs a significant trade deficit for a long period of time, it is increasingly pledging its
future to foreigners. Left unchecked, this will mean the economic slavery of the deficit country to its
foreign masters. That is, foreigners are taking the wealth of the country in return for their exports to it and
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UPDATE
at some point the wealth simply runs out. Countries that pay for trade deficits with debt denominated in
their own currency have the option of effecting a devaluation of their currency to restore their domestic
competitiveness and forcing a capital loss on their foreign trading partners. The U.S.’ abandonment of
the gold peg in 1971 ushering in the era of floating exchange rates is an example of such a move. Those
that have debt in foreign currencies, but still have their own domestic currency, can nevertheless effect a
devaluation that will sharply increase the value of their foreign debt while simultaneously boosting their
domestic competitiveness. The boost in export performance that might result could well outweigh the
increase in foreign debt service costs. The actions of Mexico in 1994 and Thailand in 1997 were both
examples of such an outcome. Of course, if the foreign debt levels are too high, the country may have to
default as well, as occurred in Latin American in the early 1980s. A country with no domestic currency that
it can devalue, has to effect a real devaluation in its export industries. That is, it has to force down wages and
reduce its people’s living standards, and also perhaps boost competitiveness with structural reforms and new
investment. Argentina pursued such a system with an explicit Argentine peso-U.S. dollar peg but went into
crisis in 1994, and was ultimately forced to abandon its dollar peg with a default on debt in 2001.
A country with a huge fiscal deficit and a large accumulated debt load, but no significant trade deficit or
debts owed to foreigners, can unburden itself either by government austerity, or forced debt reduction
through inflation or default. With austerity, involving higher taxes and/or reduced government expenditure,
there is a redistribution of wealth back to the domestic creditors who lent the money in the first place.
From a purely ethical perspective, this perhaps makes the most sense given that the debt was taken on with
such an agreement to begin with. Yet austerity will generally depress economic growth and tax revenues.
With low or no inflation, this makes the real debt load much higher requiring even more cutbacks. When
the debt loads are high, many countries often decide that the social costs to doing this are too much to
bear and that a forced debt reduction involving a redistribution of wealth from the creditors to the debtors
might be preferable. This can be accomplished either by inflation which reduces the real value of the
debt or by outright default where creditors are given back less than they lent. While the latter may seem a
perfect solution, it destroys the credibility of the borrower and makes creditors demand increasingly higher
compensation for future loans. Put differently, if creditors get no benefit for deferring consumption, they
will consume their wealth instead, making the savings rate drop for good. The government then simply
cannot borrow again. There is no free lunch. The EU (as a region) and Japan are both examples of fiscal
deficit areas where crises might be triggered in the near future.
With large trade and fiscal deficits, a country is faced with a difficult set of choices. It needs a boost in
competitiveness from a real decline in wages that can be achieved either with a recession or a large depreciation
of its currency. Unfortunately, such a reduction in real wages would have to also be accompanied by austerity
to ensure that the domestic debt is repayable. That is, the now poorer citizens of the country should be made
to tighten their belts even more. When the country has its own currency, a significant depreciation will
immediately achieve a real decline in its wages relative to its trading partners, and the ensuing trade boost
may serve to offset some of the austerity that domestic debt repayment will require. The US and the UK
today fit this mold. However, when the country does not have its own currency, as is the case in many of the
EU’s member nations, it needs to engineer real decline in domestic wages which is usually achieved with an
economic slowdown and high unemployment. But the deflationary forces unleashed will increase the real
burden of domestic debt service making the country’s adjustment much more painful. If the debt levels for the
country are high enough, the pain engendered could be so significant that an enraged (and now impoverished)
population could force the rollback of the austerity measures making the problem totally intractable.
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The European Crisis
UPDATE
There are some interesting observations one can make in regard to the European Union and the nature of
the crisis today. When one looks at the entire EU as a region, it is very similar to an early-stage Japan. The
EU as a whole is a highly competitive economy on the global stage and generally runs a small trade surplus
with the rest of the world. Germany is largely responsible for this surplus with its economy manufacturing
specialized products that appear to be in global demand despite the premium prices they command. That
said, the EU does have a longer-term debt problem. The region has a low birth rate with an extensive
welfare state that needs to be supported. Even worse, employers in the region have to deal with inflexible
labor laws that have ensured a long-term structural increase in unemployment. Labor mobility across the
region, while better of late, still lags other developed nations such as the US. Finally, despite the Maastricht
criteria that limited government debts and deficits, the region as a whole has a relatively high level of
sovereign debt with considerably higher contingent liabilities coming from the need to pay for future
retiree benefits. The EU thus needs longer term austerity to deal with its domestic fiscal issues, but does
not have the problem of being indebted to foreigners. In fact, the EU’s debt fundamentals are much less
alarming overall than those of many of its trading partners. The need for longer-term austerity can be
viewed as the macro dimension of the EU crisis.
Unfortunately, what is true for the EU is not true for each of its member countries. Countries such as
Greece labor under huge debt burdens approaching 180% of GDP and large trade deficits of over 7% of
GDP. The Greek debt burden cannot be supported on an ongoing basis under any reasonable economic
scenario, even with crushing austerity. The ultimate solution to Greece’s problems will require a significant
wealth transfer. The important question is in which direction such a transfer will occur. If Greece were to
work to repay the bulk of its debt to the EU, even with some help from them in the interim, or alternatively
give them Greek land or assets in payment, the net result will be an ongoing transfer of Greek assets to
EU counterparties. A total repudiation of debt by Greece will mean an expropriation by the nation of its
creditors’ assets. There are a number of intermediate solutions that involve partial write-downs of debt.
Many EU nations such as Portugal, Spain, Ireland and perhaps even Italy, face similar problems as Greece
albeit to a lesser degree. The current debt problems facing the region come from markets’ unwillingness to
fund these nations, requiring Germany and the other wealthier nations to come to their aid. In fact, German
debt is viewed as being among the world’s safest. Thus, the micro dimension of the EU crisis today pertains
to wealth redistribution. The indebted and uncompetitive members of the EU require a huge wealth transfer
from the healthier ones. They would like such a transfer with few, if any conditions attached. The latter
however, would prefer to act as debtors in possession. Given the huge debts owed to them, this might be the
best chance they have to ensure that they receive even partial repayment of their loans.
While most EU members would agree on the macro dimensions of the crisis and the need for austerity,
the biggest arguments have arisen on the micro elements of redistribution. The current voting regime in
the EU was designed with each nation getting a single vote on most decisions. The larger the number of
poorer nations who want wealth transfers, the more likely it is that economically mighty countries such
as Germany (who make up a much larger portion of EU output relative to their voting percentage) will
get outvoted. What Germany and the wealthier nations are presented with is an unpleasant choice where
they have to pay indefinitely for their weaker members, or tolerate the breakup of the union. It is entirely
possible to arrive at an intermediate solution where restructuring of weaker members is initiated with aid,
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along with stringent conditions being attached to the repayment of these new loans. However, the loss of
sovereignty by the recipient of the largesse could prove a huge sticking point for such negotiations.
UPDATE
The political situation in the EU further complicates what is an already difficult economic environment.
The electorates in the EU nations that voted to join the Eurozone are now realizing that the union they
joined has morphed into something quite different from what they had been promised. The EU, in concept,
is a loose association of sovereign fiscal states which share a common currency. The stringent rules for EU
accession meant that only the capable could join the EU zone. The European Central Bank was set up to
be the guardian of the common currency, with an explicit mandate to ensure its stability. The ECB was not
expected to intervene in fiscal matters of member states, nor was it allowed to expose itself to sovereign risks
by monetizing sovereign debt – it was primarily intended to safeguard the currency unit. Thus, the EU by
design was expected to operate with a stable currency used across different nations whose fiscal discipline was
to be assured by markets assigning appropriate risk spreads to member states’ sovereign debt.
The quasi-autonomous union that the EU was supposed to be has now become one where a central
government and fiscal authority are being contemplated along with wide-ranging wealth transfers across
nations. Not surprisingly, electorates in Germany and the other more prosperous countries are strongly
against such a system even if they believe in the EU as a concept. The citizens of Greece and other weaker
countries benefited for several years from an implicit transfer from the wealthier countries in terms of
cheaper borrowing costs and are being forced to recognize that that era is finished – being in the EU
has responsibilities and costs too and not just benefits. In this context, the only appropriate long-term
solution is to re-frame the EU treaty itself in a way that acknowledges this new regime where countries
give up their sovereign rights for the collective good. Chancellor Angela Merkel of Germany deserves
credit for recognizing this obvious issue and trying to force such a treaty change along with the necessary
parliamentary approvals from all EU member countries. The simple fact is that Germany cannot accept
the other nations voting to spend its citizens’ wealth.
Not surprisingly, the treaty changes being attempted are not popular with the weaker countries which
would much prefer the easier route of monetization that has so far been eschewed by Germany. A period of
enforced austerity in many of the profligate countries of Europe will reduce their living standards very likely
for a generation or longer. Even worse, it could expose the cracks in their political edifices and possibly bring
about significant change in many of their regimes. Unfortunately, these problems are inevitable unless of
course the wealthier countries commit to being perpetual welfare donors to the weaker members.
The Role of the ECB in the Crisis
Many observers of the EU crisis fault the designers of the union for not seeing the need for a more powerful
central bank that could act by charter as the lender of last resort, even with powers to explicitly monetize
sovereign debt. Yet, it is precisely the ECB’s going beyond its very limited role that has served as an
important, if not main, trigger for the crisis.
The EU by design relied on markets to enforce fiscal discipline. That is, a country that increasingly bent
the union’s fiscal rules should have seen a substantial increase in its borrowing costs and been forced into
corrective action. Yet, the ECB’s collateral rules made all EU sovereigns equivalent from the perspective of
banking risk. This meant that EU banks could borrow from the ECB at low rates and speculate on higher-
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UPDATE
yielding debt of weaker EU members with no penalty. This, in turn, meant a spate of lending to the weaker
EU nations allowing the continuation of irresponsible domestic policies, along with a dramatic expansion
in banks’ balance sheets and thus their risk.
When the collapse of the weaker sovereigns such as Greece began in 2009, the ECB should have let markets
function and force a debt default on the then much less indebted Greece. Such an outcome, while painful,
would have been relatively limited in its scope – Greece, for example, is a paltry 3% of EU-wide GDP. However,
the ECB chose to act as an agent of the banks it regulates rather than as the enforcer for systemic stability.
The ECB routinely buys and sells sovereign debt as part of its monetary operations. Rather than accepting
markets’ belated recognition of the risks in Greek, Irish and Portuguese debt reflected by their rising
borrowing costs, it acted to purchase bonds of these problem nations beyond its routine activities. Since
markets did not believe in the creditworthiness of the problem nations, the ECB has become an increasingly
larger provider of capital to these countries. Even worse, the ECB has been forced to accommodate deposit
flight from these areas with automatic loans through its inter-country TARGET2 payments system – this
was the subject of one of our previous communications.
Unfortunately, the net result of these ECB actions has been a continued expansion in the indebtedness of weaker
EU members along with huge exposure for the ECB itself to problem countries as its capital progressively
replaced private capital flows. Thus, the ECB has taken what were a sequence of private sector errors, partly
induced by its own poor regulatory framework, and compounded them into a gigantic headache for the EU
taxpayer. The numbers bear out our view. In 2009, Greece’s debt to GDP ratio was only about 120% in contrast
to today’s 170+%. Had the ECB acted in 2009 to force a Greek default, which it could have by the simple
expedient of refusing to accept Greek sovereign collateral in its monetary operations, the country’s debt ratio
could have been reduced to perhaps 60%, an acceptable threshold given currently contemplated haircuts.
Today, after a second €130 billion bailout, Greece’s debt burden will hit the levels of 2009 only in 2020!
Given its sequence of policy errors, the only reasonable action that the ECB can take now is to ensure a
modicum of near-term market stability so that hard political decisions about bailouts and restructuring can
be made quickly. In fact, there is good reason for the ECB to limit its activity because the greater the urgency
of the crisis, the more certain is a workable political solution. Unfortunately, the ECB has continued to
increase its involvement with the weaker countries most recently with the December announcement of
the Long Term Repo Operation (LTRO).
The Long-Term Repo Operation (LTRO)
With the LTRO, the ECB committed to providing funding for 3 years at 1% against acceptable collateral
for any bank in the EU system. Acceptable collateral included the bonds of the problem Euro members
such as Greece, Portugal, Spain and Italy. Banks, especially in the weaker countries, used the LTRO
facility to the tune of almost €500 billion in December 2011, with the expected take-up expected to be
almost €1 trillion in a second operation to be conducted in late February.
At face value, the LTRO seems a reasonable way to inject liquidity. However, it has extremely perverse
effects because of the collateral that the ECB is willing to accept. Markets believe that there is a high
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UPDATE
probability of an Italian or Spanish debt default given their debt levels and internal growth issues. As such,
the safest banks in the EU that operate with high levels of capital would not consider buying Italian bonds
unless they were more than adequately compensated for their risk through higher rates. This is simply
because the safest bank has something to lose – its capital.
A bank that was unsafe or effectively insolvent, as for example an Italian bank that is already exposed to
toxic Italian sovereign debt in huge amounts, would jump at a chance to use the LTRO facility to buy
Italian bonds. The logic here is that if there is an actual default by Italy, the bank in question (which
already has virtually no capital) would surely be declared insolvent which would leave the ECB with all
the losses on the Italian bonds. Yet, if Italy were to keep paying, or even if the crisis just dragged on for
another 3 years, the bank would be able to enjoy the spread between its 1% financing from the ECB and
the much higher Italian interest rate. Given the happy result that the bank keeps 100% of its gains but
the ECB keeps 100% of the losses in the event of default, our insolvent bank will use the LTRO to the
maximum extent permissible.
The results of the first LTRO in December 2011 reflected the perverse dynamics at play here. The Spanish,
Italian and some French banks were among the most aggressive users of the facility. The safer banks in the
system did not see much need for it. In fact, cash deposits with the ECB have soared in recent months as
the safest banks keep their free cash in the central bank in preference to lending it out.
The LTRO has had an undeniable benefit for problem issuers like Italy which might otherwise have
had trouble raising debt. Any Italian debt up to 3 years can be bought by a bank and financed via the
LTRO without any risk, as long as the latter is close to insolvency. As such, the LTRO has resulted in a
significant drop in short-term Italian and Spanish rates. The ECB, by acting through its worst banks thus,
has effectively monetized Italian and Spanish debt in the short end, in direct contravention of its charter.
In that respect, the LTRO is very similar to the Federal Reserve’s QE program. Yet it is different from QE
in that the risks of capital losses from the collateral provided are technically being borne by the banks
even if the ECB is holding the same. This difference is entirely cosmetic though – if Italy or another large
sovereign defaults, the ECB will surely bear all the losses.
It is amazing when one considers that in a single LTRO transaction the ECB has taken on more toxic
assets than the entire European Financial Stability Fund (EFSF) contemplated doing. ECB Governor
Mario Draghi’s fig-leaf for this aggressive monetization was that the recent agreement among EU members
to limit fiscal deficits (the so called “fiscal compact”) meant that future debt issuance would be severely
limited allowing the ECB to act to stabilize markets. Were we to give Governor Draghi the benefit of the
doubt, the only rationale for his action is that policymakers in the Eurozone have indeed concluded that
draconian austerity is inevitable for member countries. Countries like Greece then face only a future
where they leave the Eurozone after a default – a process that might be accelerated by the increasingly
stringent requirements for fiscal cutbacks. But then, we are talking about a very bleak growth outlook for
Europe as a whole. Limited sovereign debt issuance will continue to be underwritten by the banks with
ECB support, but a credit crunch over time is inevitable. Fiscal cutbacks will add to growth weakness.
And the bleak economic and political landscape will result in little to no new investment. While a collapse
of the Euro currency might be desirable, it is unclear that that will help matters for any nation except
Germany which has little need for an export boost at this stage.
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UPDATE
We can anticipate Japan-like conditions within Europe for the next decade then, except that Japan started
its long adjustment with a debt to GDP ratio of about 15% and used aggressive fiscal policy to mitigate
the effects of its bubble era excesses, keeping unemployment at 5% for the entire period. Europe’s starts
with an 80+% region-wide debt to GDP ratio and the EU is going to be tightening fiscal policy when
unemployment is already over 10% region-wide. We question the longer-term sustainability of austerity
in the EU given popular sentiment. We also believe that the ECB has put its head in a noose from which
extrication is virtually impossible. While markets may have been calmed by the ECB action, the longerterm risks for the Eurozone as a whole have increased dramatically.
The Coming Austerity outside Europe
While we have focused so far on the EU, one needs to remember where we started. The EU, for all its
problems, is among the least indebted in the world after the developing nations viewed as a group. Japan,
by most metrics, is more indebted than its trading partners and already faces a deflationary problem even
with continued huge fiscal deficits. Any question about Japan’s solvency could trigger capital flight and a
yen decline. The only saving grace is perhaps that a yen decline, even if it occurs under circumstances of
sovereign concern, would help Japan’s exports and ultimately feed through into domestic inflation.
The U.S. and the U.K., in addition to having huge fiscal deficits, also have large trade deficits. While
the U.K. is actually attempting austerity, its efforts have done little to reduce deficits to acceptable levels.
Inflation in the U.K. is also running at high levels but despite this, the Bank of England has engaged in
aggressive monetization of the country’s debt. The U.S. has avoided any austerity at all so far. Virtually all
its leaders (and potential leaders) continue to present economic plans that involve increased expenditure
and limited or no tax increases, while making fatuous growth projections 20 years out for deficit reduction.
Any real attempts at austerity by the U.S. in particular could lead to a dramatic growth slowdown in the
country, if not the world. But the large fiscal deficits of the U.S. are leading to a continued increase in
its debt levels. The only reason that US bond yields have not spiked already due to solvency concerns is
because of the U.S. Federal Reserve’s debt monetization through quantitative easing. But this has only led
to increased vulnerability in the U.S. – the largest foreign holders of U.S. debt such as China have already
sharply curtailed their bond purchases.
Conclusion
With conditions being the way they are, it is hard to get excited. The EU may have set the stage for austerity
and deflation notwithstanding the ECB’s actions. The U.S., and to a lesser degree the U.K., seem firmly
on the path to hyperinflation. Unfortunately, in either outcome, we have trouble identifying countries or
regions that could serve as locomotives for global growth. Even the perennial favourite, China, appears to
be in the throes of a painful real-estate-bubble induced retrenchment.
We are increasingly of the view that a major realignment in markets is likely this year, and perhaps as
early as in the first six months. Market participants are altogether too sanguine about the risks we see
everywhere. The fundamentals have deteriorated significantly over the last year even as market euphoria
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UPDATE
has returned. There seems to be no problem that omniscient central bankers cannot solve with the manna
of money. The only thing we are sure of now is the post-crisis narrative. When markets adjust sharply to
the fundamentals which are so undeniably obvious, we fully expect the consensus view to be then that no
one could have possibly seen all this coming.
Performance Summary at January 31, 2012
Trident Global Opportunities Fund
1 Mth.
3 Mth.
6 Mth.
1 Yr.
2 Yr.
3 Yr.
5 Yr.
10 Yr.
YTD
Since Inception
(Feb. ‘01)
-0.9%
1.6%
3.5%
-1.6%
-3.2%
20.4%
10.9%
0.0%
10.5%
0.0%
CI Global Opportunities Fund
1 Mth.
3 Mth.
6 Mth.
1 Yr.
3 Yr.
5 Yr.
10 Yr.
15 Yr. YTD
Since Inception
(Mar. ‘95)
-0.8%
1.3%
3.2%
-3.1%
22.9%
9.9%
16.0%
0.0%
17.5%
0.0%
Nothing herein should be read to constitute an offer or solicitation by Trident Investment Management, LLC or its principal to provide investment
advisory services to any person or entity. This is not to be construed as a public offering of securities in any jurisdiction of Canada. The offering of
units of the Trident Global Opportunities Fund are made pursuant to the Offering Memorandum only to those investors in jurisdictions of Canada
who meet certain eligibility or minimum purchase requirements. Important information about the Funds, including a statement of the Fund’s
fundamental investment objective, is contained in the Offering Memorandum. Obtain a copy of the Offering Memorandum and read it carefully
before making an investment decision. These Funds are for sophisticated investors only. ®CI Investments and the CI Investments design are
registered trademarks of CI Investments Inc.
2012
JAN